Prof. Dr. Khawaja Amjad Saeed*

LIFE INSURANCE

In Pakistan Potential Galore

Email:

PRELUDE

For a breakthrough in the economy of a country, focused and targeted strategies are needed in three areas, namely:

1) AGRICULTURE:

- This has the following four constituents:

(a) Crops – major and minor

(b) Livestock

(d) Fisheries

2) MANUFACTURING

- This includes:

(a) Industrial Sector – high-tech, large, & small and medium sectors.

(b) Mining

3) SERVICES

- Four components of service sectors includes:

(a) Technological

(b) Physical

(d) Financial

Financial listed sector in Pakistan includes: Mutual Funds (open and closed), Modarbas, leasing, banks (investment and commercial) and insurance.

Life insurance in Pakistan (domestic and foreign) was nationalized in 1972 and State Life Insurance Corporation (SLIC) was established. Later when democratic set up started towards the end of 1980’s and in 1990’s, life insurance business was opened up to private sector on a modest scale SLIC annual reports are available and based on its 2005 report, some analysis has been carried out. It reveals tremendous potential to be tapped in Pakistan.

* Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore Pakistan,

Member Governing Council, International Federation of Accountants (IFAC) (1997-2000), President, South Asian Federation of Accountants (SAFA) (1997), President, Institute of Cost and Management Accountants of Pakistan (1997-2000), President, Association of Management Development Institutions of South Asia (AMDISA) (1993-96), Pro Vice-Chancellor University of the Punjab, Lahore (1994-1996), Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore (1973-1996).

SELECTED ASPECTS ANALYSIS

This piece looks at the following aspects:

A: A brief review of some objectives of SLIC.

B: SLIC Progress and Challenges.

C: SLIC Growth in Policies in force: Individual lives.

D: SLIC Growth in Policies in Force: Group Lives.

A review in respect of above is presented below:

A: SLIC OBJECTIVES

Based on 2005 SLIC Report (Page – 7), there is an emphasis on achieving certain objectives. However, research reveals the following:

1) One of the objective includes “Maximize” returns and economize expenses”. This objective is a laudable one and is well appreciated. However, the results are as under:

a) Income increased by 9.35%

b) Expenses increased by 12.01%.

The reality runs opposite to the above conceived objective.

2) The objectives also includes to increase yield from SLIC Funds investments. Based on analysis, it manifested a decline of 4.5%.

3) The objectives include to “widen areas of operations of life investment for common man in towns and villages”. This appears to be an agenda of tomorrow. Innovation is the crying need to develop “products” for common man and its coverage needs to be widened to towns and villages. When will this be done? Is there a clear cut road map? Who will prepare this? These soul searching questions scream for a positive response from SLIC.

B: SLIC PROGRESS – 2005 AND CHALLENGES

1) The progress has been declared as “satisfactory” (Page-8). In today’s vibrant world, expectations are pegged very high. Mere achievement of “Satisfactory Results” is an ordinary approach which needs to be replaced with “glorious” or “outstandingly outstanding” or “Excellent” results. This is a challenge for SLIC and it must positively respond in this direction.

2) SLIC has a reported investment portfolio of Rs. 125 b (P.61). However, during 2005, a decline of 4.5% was shown in net investment income. This feedback needs to be taken in a positive perspective. First the trend be reversed and later, based on judicious, prudential and professional manner, positive trends be developed to add a glorious chapter to SLIC in portfolio management as part of sound management of funds approach. SLIC ought to be in search of enlightened and sound investment strategies which must focus on future risks.

3) Increasing surrender rates are challenging task which need to be urgently addressed in an appropriate and positive manner.

4) Based on information available, training is being given to field workers. This training must ensure achieving high results and the bottom line must be beefed up, failing which “Value Creation” will not take place.

5) Efforts be undertaken to ensure that “compensated absences of post retirement medical benefits” are provided in the books of accounts to avoid qualification by external auditors and reflect true surplus for communication to policy holders and shareholders. The services of an actuary can benefit in this respect.

6) An overall expense ratio of 36.3% (P.61) has been worked out. Steps be initiated to ensure its reduction on a staggered basis over a medium term three years plan. The services of a practicing Cost & Management can be a logistical support in this direction. This ratio be compared with international benchmark and steps be initiated to ensure reduction for the benefit to all stakeholders.

C: SLIC: GROWTH IN FORCE: INDIVIDUAL LIVES

The following box No. 1 presents statistical data for the last five years. The analysis is based on normal base concept of index and rolling concept of index.

Box -1

SLIC: Growth in Policies in Force: Individual Lives

Year Number (Million) / Percentage (%)
Base Index / Rolling Index
2005 / 2.04 / 112 / 106
2004 / 1.93 / 106 / 104
2003 / 1.85 / 102 / 103
2002 / 1.80 / 099 / 99
2001 / 1.81 / 100 / 100

Source: Extracted and calculated from: Annual Report 2005, State Life Insurance Corporation of Pakistan, P. 61.

The above box presents a statistical analysis. It shows how slow is the progress and how big is the potential. Following conclusions can be drawn:

1) Annual average growth in the above five years has been 2.4%.

2) Rolling Index presents a sharper analysis and is a wake up call for an aggressive marketing strategy.

3) A breakthrough is needed to ensure quantum jump in number of individual life policies.

4) To accomplish the objectives of SLIC, a bold marketing approach is needed to “Widen areas of operations of life insurance for common man and in towns and villages”.

5) There is a need to revisit the declared “Objectives” of SLIC and initiate a self analysis. A Stakeholders Conference may be held to help SLIC to achieve its objectives.

6) Insurance culture as a Way of Life needs to be cultivated through a market driven approach. Synergy can be created through seminars, workshops, insurance fairs, puncturing fears of potential policy holders and undertaking all steps which would ensure success of the cause of making insurance a Way of Life.

7) Qualitative and quantitative analysis of existing training courses for field orientation be undertaken for improvement.

8) A strategic plan for Manpower Development, Department of SLIC is the crying need of today.

9) Leading Universities in Pakistan must start BBA (Hons) four years and MBA two years and Executive MBA two years program. Hailey College of Banking & Finance, the 5th Constituent College of the University of the Punjab, Lahore has provided a lead in this respect in 2006 for the first time in the history of Pakistan.

10) Degrees by leading Universities in Pakistan be offered with a clear and transparent manifestation of “Insurance & Risk Management”. This will broaden the scope of job openings. These will be available in several sectors and not in Insurance industry alone.

11) The Ministry of Commerce, Government of Pakistan, under the able leadership of Mr. Humayun Akhtar, is ever keen to develop a strong infrastructure for insurance education in Pakistan. It is hoped that some announcements in this respect will be made in the forthcoming Trade Policy for 2007-08 to be announced in July 2007.

D: SLIC GROWTH IN POLICIES IN FORCE: GROUP LIVES

Group life is compulsory in Pakistan for specified industries who employ certain workers above an announced threshold. It is mandatory in Pakistan. The following box captures overall position.

Box -2

SLIC : Growth in Policies in Force: Group Lives

Year / Number (Million) / Percentage (%)
Base Index / Rolling Index
2005 / 3.73 / 113 / 96
2004 / 3.90 / 118 / 106
2003 / 3.63 / 111 / 107
2002 / 3.44 / 104 / 104
2001 / 3.30 / 100 / 100

Source: Extracted and calculated from: Annual Report 2005, State Life Insurance

Corporation of Pakistan, P. 61.

A careful analysis of the above box reveals the following:

1) Annual average growth during the last five years has been 2.6%.

2) Unfortunately in 2005, declining trend was manifested. This is a wake up for SLIC. It appears that the aggressive and motivated private sector in life insurance seems to be capturing the share of market and thus the base Index and Rolling Index have shown a declining trend. This feedback be taken with a positive outlook and the trend must be reversed. The strategic thinkers of SLIC must at least target an annual increase of 10% rather than stay content with the present situation.

3) For achieving the suggested target of 10% mentioned in para (2) above, a strategic plan be prepared and its implementation be periodically monitored to help achieve positive results.

4) A “Mapping Chart” approach be used to ensure proper analysis, field visits to potential sectors and lay out all logistical goals to achieve the foregoing suggested results.

5) An institutionalized approach of MIS through computer assistance can help achieve the foregoing suggested objectives. Nothing succeeds like “Success”. Target for annual growth be established and achieved through financial and non- financial approach.

CONCLUSION

The foregoing analysis has been undertaken with a positive approach. It is hoped that this will help create an awareness towards expanding the horizon of life insurance by tapping the untapped potential. A strong strategy with a breakthrough approach is the crying need. All stakeholders must join hands together to achieve the above object and ensure that life insurance business expands. This will provide employment openings to the educated youth, strength social fabric of the country, extend welfare front and all told will enable life insurance sector to serve the country in a pronounced manner. The earlier this is done the better.